By Chen Shiyin
Dec. 10 (Bloomberg) -- Investors should buy Hong Kong Exchanges & Clearing Ltd. (http://www.bloomberg.com/apps/quote?ticker=388%3AHK) and short sell Singapore Exchange Ltd. (http://www.bloomberg.com/apps/quote?ticker=SGX%3ASP) in the next three months because the smaller bourse will be more affected by slowing derivative trading, JPMorgan Chase & Co. said.
Derivatives trading fell 25 percent in Hong Kong in November from the previous month, compared with a 35 percent drop in Singapore, JPMorgan said. Volumes in the two cities have still climbed 43 percent and 20 percent, respectively, this year.
Hong Kong Exchanges (http://www.bloomberg.com/apps/quote?ticker=388%3AHK) has dropped 68 percent this year, compared with a 61 percent decline in Singapore Exchange. Derivatives accounted for about 19 percent of Hong Kong Exchanges’s third-quarter revenue, half of the 38 percent for the Singapore exchange operator, the brokerage said.
“Total derivative trading has started to slow already in recent months,” analysts led by Harsh Wardhan Modi (http://search.bloomberg.com/search?q=Harsh+Wardhan+Modi&site=wnews&client=wnews&proxystylesheet=wnews&output=xml_no_dtd&ie=UTF-8&oe=UTF-8&filter=p&getfields=wnnis&sort=date:D:S:d1) said. “The decline was sharper in Singapore. We recommend a trade to long Hong Kong Exchanges and short SGX for three months.”
Short selling is a practice that allows investors to sell borrowed shares and buy them back at a lower price.
JPMorgan cut its rating (http://www.bloomberg.com/apps/quote?ticker=SGX%3ASP) on Singapore Exchange, or SGX, to “neutral” from “overweight” and reduced its share-price estimate by 31 percent. The brokerage also lowered the target price for Hong Kong Exchanges (http://www.bloomberg.com/apps/quote?ticker=388%3AHK) by 54 percent. The Hong Kong-based company is also rated “neutral.”
Stock trading has already declined in 2008, with average daily turnover in the Hong Kong dropping about 14 percent from a year earlier, JPMorgan said. The value of shares traded in Singapore has slumped 33 percent during the same period, the analysts estimated.
Hong Kong Exchanges
The Hong Kong bourse may rebound as a rally in Chinese stock markets boosts so-called H shares, the brokerage said, referring to stocks of mainland companies traded in the city.
China’s CSI 300 Index (http://www.bloomberg.com/apps/quote?ticker=SHSZ300%3AIND) has jumped 26 percent since reaching a two-year low on Nov. 4, when the Chinese government pledged to implement a 4-trillion yuan ($583 billion) economic stimulus package and the benchmark lending rate was cut by the most in 11 years.
The Hang Seng China Enterprises Index (http://www.bloomberg.com/apps/quote?ticker=HSCEI%3AIND) rallied 22 percent during the period, more than the 6.2 percent advance in the benchmark Hang Seng Index.
“The short-term catalyst we see for Hong Kong Exchanges is a revival in the A-share market, which should lead to better performance of Hong Kong-listed Chinese equities, which account for roughly half of the total market turnover,” the analysts wrote. A shares are yuan-denominated stocks traded on the Chinese market
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